October 9 Letter to Clients

Please let me start out by saying that I know things aren’t going well lately and since 1986 when I began counseling clients I can’t remember this much chaos and confusion being felt throughout the world. The U.S. is a great country and our stock markets have recovered from all events that have occurred, so I am very optimistic about our long-term prospects. However, at the moment, the markets are vicious, investors fear is as high as ever and the daily 200 point swings in the market create anxiety. The silver lining in all of this is that usually with this kind of capitulation, when investors feel they can’t take it anymore, it may be a sign that the markets are close to a bottom and could turn around soon.

In this writing, I will share with you my thoughts about where we are and hopefully where we are going along with a few enclosures that I found interesting and informative. My main priority is you my client, so if I haven’t talked with you already, please don’t hesitate to call me if you are uncomfortable.

The question that I hear most often is “Will my investments go down to zero?” I ask in return “Your home is an investment, will it go down to zero?” and the response is usually “It won’t go down to zero, but…..” So if we had our home’s fair market value appraised daily like we do our stock investments, we would see the price of our home rise and fall like stocks do. During times like this it is easy to forget that both are long-term investments that we don’t plan on selling in the near future. The stock market has always recovered and there is no doubt that it will come back this time as well.

Our portfolios are long term in nature with a time horizon that may span decades for some clients and the key risk is failure to meet secular return goals rather than avoiding losses during difficult times like these. Our fundamental view of how best to invest the portfolios has not changed despite all that is happening today. I will continue to diligently monitor our investment managers to gain both a full appreciation for the risks being assumed along with the decisions that are being made during this unusual and tumultuous period. The theme among our managers is that they aren’t investing in the stock market but in individual businesses. Even though the stock market is down, they believe in the companies they own.

Volatility brings opportunity and has allowed me to diversify some holdings that will hopefully perform better when stocks begin to rally again. It is unnatural for me to make changes without good reason; some of our trades have paid off since the beginning of the year while others haven’t. I feel that this recession is in its early stages and the consumer will be squeezed further as we enter the holiday buying season and winter heating bills start arriving in the mail, so for example, I sold off our Retail ETF and FBR Focus Fund which were overweight in consumer discretionary holdings. I have also added gold to many portfolios as an inflation hedge. If only we could close our eyes for one year, or better yet, not open any investment statements, I feel that things will be much different than they are today. In summary, I have the utmost confidence in what we own long-term, whereas today, it doesn’t matter if it is a good company or mutual fund, most investments have lost value.

The economy has gone from fragile to worse and what we have witnessed over the past two weeks has been a sensitive topic as to how much government(s) should get involved. Please note that I am not registered in any political party, a “Blank”, so I am not supporting one side over another. I am not qualified and never feel comfortable talking politics, but lately have been asked about current events so I will share my thoughts and hope that it isn’t taken out of context.

It was embarrassing to see Treasury Secretary Henry Paulson get on his hands and knees begging Congress to pass his 3 page version of a rescue package two weeks ago. Federal Reserve Chairman Ben Bernanke chimed in agreement as to how important this was to Main Street. Critics of Henry Paulson state that he led Goldman Sachs, a company that was involved in the exotic investments that are at the root of this mess, so could his experience be a positive because he has a sense as to how these investments were structured compared to previous Treasury Secretaries who might not have understood them as well.

As a taxpayer I wasn’t happy about spending $700 billion to shore up the financial system or enabling a few people to spend it as they wished and feel that the capital market(s) should take care of itself. When we have two intelligent people shouting from the mountaintop about how urgent it was to throw water on a wild fire that was burning out of control, America has to trust that they had taken into consideration our best interests. We are left wondering if over $2 trillion would have been lost since then if the original $700 billion bill was passed. Now we understand better what Paulson and Bernanke meant when they said that it is as much a Main Street problem as it was a Wall Street problem.

The enclosed 1999 NY Times article regarding Fannie Mae shows that our problems originated back in the days of the Internet bubble when Wall Street was getting fatter by the minute. After two weeks of hearings and political sparring, Congress ended up passing a 400 + page rescue package bill filled with so much pork that it diluted the intent of what it was for. So as we look back, it was probably too little, definitely too late and the wild fire has now spread around the globe. Since 1999, we are left asking the question “Where were the check(s) and balance(s) that Congress is responsible for?” Why wasn’t Congress just saying “NO” to Wall Street?

A chart illustrating returns for the S&P Index after a trough over the past nine bear markets which on average have been positive. The stock market is down almost 35% since the market peaked in October 2007. The chart shows the average decline in previous bear markets was (-32%), but note the 1, 3 and 6 month returns after the trough were +11%, +15% and +23% respectively. I point this out because if an investor tries to time the market and misses out on just a 1, 3 or 6 month rally they may have lost the opportunity to recoup some of their losses.

To end, I would like to share a visit I had today with a client who lives in Columbia County. With all of this craziness, she reminded me that now and again we should get away from all of the noise in order to put things in perspective. I have watched at least 100 or more “Breaking News” streamers on CNBC so far this week which doesn’t ever feel good when it centers on negative headlines. Bad news sells papers as they say, and most outlets don’t want you to know what is going well today. Long-term investors with patience and discipline will watch the stock market recover and hopefully erase their paper losses whereas others who panic and sell now will have bonafide realized losses which they can’t ever recover. In time, the markets will return to normalcy and the best thing we can do is keep things in perspective.

We are in uncharted waters and I thank you for the trust you have in our ability to help you weather these storms. Please call me with any questions or concerns you may have or if your tolerance for risk has changed asap.